There were 40 fewer banks at the end of the second quarter than there were at the end of the first quarter according to data just released by the FDIC. On June 30, 2011, there were 117 fewer banks in the banking system than at December 31, 2010.
The commercial banking system continues to shrink.
The good news?
The number of institutions on the FDIC's "Problem List" fell for the first time in 15 quarters. The number of "problem" institutions declined from 888 to 865. This is the first time since the third quarter of 2006 that the number of "problem" banks fell.
The FDIC closed only 20 banks in the third quarter of 2011. The average number of FDIC closings per week for the year 2.
So, the pace at which the banking system is declining appears to be slowing.
The smaller banks continue to bear the burden of the decline. Since the end of 2010, about 3 percent of the banks with assets of less than $100 million have fallen out of the banking system. The total number of these banks that dropped out of the banking system was 64.
Note that these smaller banks make up only about 1 percent of the total assets in the banking system.
The number of banks with assets between $100 million and $1 billion declined by 61 banks, but this represented only about 2 percent of the number of banks in this category.
Note that this category of bank makes up only about 8 percent of the total assets of the banking system.
The largest banks, those with assets of more than $1, actually increased by 8 in the first half of 2011. Note that these banks make up 91 percent of the total assets in the banking system.
Remember, from the Federal Reserve statistics, the largest 25 commercial banks in the United States make up about 60 percent of the total banking assets in the country.
The vast majority of the banks on the FDIC’s list of problem banks fall in the less than $100 million in asset class. The middle class of banks ranked by asset size make up the next largest portion of the problem list.
So, it seems as if we need to say good-bye to the smallest banks and farewell to many of those in the middle category of banks. Even if these smaller institutions are not closed, they will be acquired by the larger banks and so the average size of bank in the United States will continue to rise.
My forecast for the past two years is that the number of banks in the banking system will drop to under 4,000 over the next four-to-five years. Not only will this decline occur due to the weeding out of the problem banks, but the smaller banks will just not be able to compete in the new world of banking that is so dependent upon the new information technology spreading throughout the financial world.
And, the larger banks?
Again, I see that the largest twenty-five domestically chartered banks in the United States will control close to 70 percent of the total assets in the banking system over the next four-to-five years. Foreign-related financial institutions will move up to the 10- to 15-percent range.
So, the 3,950 or so smaller banks will have only 15- to 20-percent of the total assets in the banking system. This will mean that we will still have a lot of smaller banks around…or, my estimate that there will still be around 4,000 banks in the banking system is optimistic.
The banking system in the United States is changing. We are not a country based on agriculture that needs a lot of local banks. That went out with the 1930s. We are not a country anymore that is based on manufacturing that needs a lot of sizeable regional banks. That went out with the 1980s. We are a country that is in the midst of the information age and the predominant financial institution in such an age will be large and will have a sizeable international presence.
So, the decline in the number of banks in existence is not surprising. The fact that the decline will continue is also not surprising. And, a continuing decline will take place even if the economy picks up strength.